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Compensation (extinguishment)
mainly discussed in Chapter 4 - Section 5 (Articles 1278-1290) in Title I of Book IV of the Civil Code of the Philippines. The compensation is a mode of extinguishment of obligation wherein there is simultaneous balancing or weighting of two obligations of two persons who are reciprocally debtors and creditors of each other.Civil Code, Article 1278 It extinguishes to the extent in which the amount of one is covered by that of the other. The compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even without the consent of the parties.Civil Code, Article 1290 Characteristics of Compensation A compensation of obligations is considered as a simplified payment that aims to: *facilitate payment in a more convenient and less expensive way. *guarantee the effectiveness/enforcement of credit against fraud, insolvency, etc. *prevent unnecessary suits and payments thru the mutual extinction by operation of law of concurring debts.La Compañia General de Tabacos v. French and Unson; G.R. No. L-14027 (1918) A compensation as distinguished from a payment: *a compensation take effect by operation of law, while a payment takes effect by act of the parties. *a compensation does not require the parties to have the capacity to give and to receive, while a payment requires such capacity. *a compensation can bee partial extinguishment, while a payment must be complete and indivisible. A compensation as distinguished from a ''confusion'': *a compensation requires two persons to be mutually debtor and creditor each other, while a confusion requires only one person to be both the debtor and creditor. *a compensation covers two obligations, while a confusion covers only one obligation. A compensation as distinguished from ''counterclaim'': *a compensation takes effect by mere operation of law, while a counterclaim must be pleaded to be effectual.Yap Unki v. Chua Jamco; G.R. No. L-5202 (1909) *a compensation requires both debts to be in the form of money or of same kind and quality,Civil Code, Article 1279 (2) while a counterclaim does not require such. *a compensation requires both debts to be liquidated, while a counterclaim does not require such. *a compensation is mainly governed by the Civil Code, while a counterclaim is mainly governed by Rules of Court. Requisites of Compensation A legal compensation requires: *that both parties must be mutually creditors and debtors to each other and be bound principally.Civil Code, Article 1279 (1) *that both debts must consist in sum of money or if consumable, of the same kind or quality. *that both debts be due at the same time.Civil Code, Article 1279 (3) *that both debts be liquidated and demandable.Civil Code, Article 1279 (4) *that neither debt is held by any retention or controversy commenced by third persons, and communicated in due time to the debtor.Civil Code, Article 1279 (5) *that the debts are allowed by law.Civil Code, Article 1287 A compensation shall take effect by operation of law when all the aforementioned requisites are present, even though the creditors and debtors are not aware. Kinds of Compensation according to its effect or extent: *''complete/total'' - covers the two obligations of the same amount;Civil Code, Article 1281 extinguishes both debts entirely, hence no balance remaining. *''semi-complete'' - covers the two obligations of different amounts to the extent in which the amount of one is covered by that of the other; extinguishes the smaller debt entirely and the larger debt partly. *''partial'' - covers only a part of the two obligations of different amounts; extinguishes both debts partly. according to its origin or cause: *''legal'' - by operation of law with all the requisites are present.Civil Code, Article 1279Civil Code, Article 1290 *''voluntary'' - by mutual agreement and consent of the parties even if the debts are not yet due.Civil Code, Article 1282 *''judicial'' - by an order from a court as pleaded by one party.Civil Code, Article 1283 *''facultative'' - by unilateral choice of one party to claim or oppose compensation; no mutual agreement needed. Compensation of Rescissible or Voidable Obligations A compensation is applicable to rescinable and voidable debts before they are juridically rescinded or declared null and void.Civil Code, Article 1284 However, the nullification of such debts have retroactive effect, which deemed the compensation to have never took effect. There is also still a liability on the one who caused the breach of obligation. Effects of Assignment of Rights in Compensation A legal compensation can still take effect before or after the creditor (assignor) assigned his right (debt) to a third person (assignee). The right to the compensation in case of an assignment of rights: *with the consent of the debtor - the right to the compensation is waived, unless the debtor reserved his right to the compensation.Civil Code, Article 1285, par.1 *with the knowledge but without the consent of the debtor - the right to the compensation may be set to the debts due prior to the assignment, but not to subsequent/later ones.Civil Code, Article 1285, par.2 *without the knowledge of the debtor - the right to the compensation may be set before or after the assignment, until the debtor had knowledge of such assignment.Civil Code, Article 1285, par.3 Compensation at Different Places A legal compensation can still take effect even if the debts are payable at different places. This is possible if the party who raises his right to the compensation shall pay indemnity:Civil Code, Article 1286 *for expenses of monetary exchange in case of payment of money. *for expenses of transportation in case of delivery of thing. Compensation in case of Several Debts The rules on the application of payments shall apply if the debtor has various debts which are susceptible of compensation.Civil Code, Article 1289 The debtor must inform the creditor which of among those debts shall be the object of compensation. His failure to inform would allow the creditor to apply the compensation to the most burdensome debt (onerous obligation).Civil Code, Article 1252Civil Code, Article 1254 Compensation against the Government A compensation may not take effect on taxes, which are obligations to the government. One cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. A compensation may take effect on debts due to the government in its corporate capacity. Prohibited Compensations A compensation is not allowed by the law: * if one of the debts arises from a depositum or deposit,Civil Code, Article 1287, par.1 wherein one receives a thing belonging to another, with the obligation of safely keeping it and of returning the same.Civil Code, Article 1962 (not to be confused with a 'deposit in a bank') * if one of the debts arises from a bailee (agent) in commodatum,Civil Code, Article 1287, par.2 wherein one gratuitously delivers something to the other to be used for a certain time and then return.Civil Code, Article 1933 * if one of the debts arises from a claim for support due to gratuitous title, which are deemed “vital to the life of the recipient". This only applies to support in arrears (behind schedule), but not to future support.Civil Code, Article 301, par.1 * if one of the debts consists in civil liability arising from a criminal/penal offense; the fulfillment of such obligation is imperative or necessary.Metropolitan Bank & Trust Company v. Tonda; G.R. No. 134436 (2000) This only applies to the accused, but not to the victim of a crime.Observation on the new Civil Code, Justice J.B.L. Reyes (1951) Such prohibitions only applies to the party that has such debts. This is in order to prevent breach of trust and confidence. Although one party cannot use compensation, the other party has the option to claim or not to claim compensation. This is a facultative compensation. Bibliography General References: Websites: Citations: Category:Obligations and Contracts Category:Extinguishment of Obligation